11/15/2011

In the Spring of 2010, a bespectacled, middle-aged policy wonk named Peter Schweizer fired up his laptop and began a months-long odyssey into a forbidding maze of public databases, hunting for the financial secrets of Washington’s most powerful politicians. Schweizer had been struck by the fact that members of Congress are free to buy and sell stocks in companies whose fate can be profoundly influenced, or even determined, by Washington policy, and he wondered, do these ultimate insiders act on what they know? Yes, Schweizer found, they certainly seem to. Schweizer’s research revealed that some of Congress’s most prominent members are in a position to routinely engage in what amounts to a legal form of insider trading, profiting from investment activity that, he says, “would send the rest of us to prison.”

Walter Olson courteously rounds up the list of high profile cases identified by Schweizer:

Washington has been buzzing for the past 48 hours over revelations that some of Capitol Hill’s best-known lawmakers have been making fortunes speculating in the stocks of companies affected by official actions, typically while in possession of market-moving inside information. Rep. John Boehner (R-OH), Senatorial wife Teresa Kerry and others made bundles trading in health companies’ stocks shortly before Congressional or executive-branch action affecting the companies’ fortunes. After closed-door 2008 meetings in which Fed chairman Ben Bernanke briefed Congress on the gravity of the financial collapse, some lawmakers dumped their own stockholdings or even placed bets that the market would fall. Rep. Nancy Pelosi (D-CA) got access to highly desirable IPO (initial public offering) stock placements, some in companies with business before Congress. And so on. Studies have found that lawmakers as a group reap far above-average returns on their investments—suggesting either that these politicians are among the world’s cleverest investors, or else that they are profiting from inside information. All this has been turned into a front-page issue thanks to Throw Them All Out, a book by Hoover fellow Peter Schweizer, whose findings were showcased the other night on 60 Minutes.

Regular readers know that I believe Congressional insider trading is both wrong morally and ethically but also legal under current law. Hence, my support for the STOCK Act, which would ban it. See my article Insider Trading Inside the Beltway. Very regular readers know I've been going back and forth with law professor Donna Nagy on this issue in the comments section of a prior post. FWIW, Olson agrees with me:

So the question is: is all this legal? While there’s some difference of opinion on the issue among law professors, the proper answer to that question is most likely going to be, “Yes, it’s legal.” As UCLA’s Stephen Bainbridge points out, existing insider trading law, developed by way of a long series of contested cases under the Securities and Exchange Commission’s Rule 10b-5, assigns liability to persons who are not corporate insiders if they are violating a recognized duty of loyalty to those for whom they work. As applied to the investment whizzes of the Hill, this implies that trading on inside information might be a violation if done by Congressional staffers (since they owe a duty of loyalty to higher-ups) but not when done by members of Congress themselves.

So, apparently, does Schweizer:

When Schweizer began his project, he consulted a former securities regulator, who happened to have an office down the hall from his in Florida. The adviser told him that investigators always look for two things in insider-trading cases: whether individuals had access to material information and whether they engaged in unusual trading. There is probably no group of people on earth with greater access to inside information than members of Congress; K Street lobbying firms get rich fees from hedge funds for ferreting out intelligence (such as whether some pending legislation has the votes to pass) that any member of the Senate or House routinely obtains in the cloak room.

But there have been no insider-trading cases brought against members of Congress, nor will there likely be. This is partly because, though insider-trading law is not settled, case law usually requires that an offending insider bear fiduciary responsibility at the company involved. But Congress’s relative immunity also owes to the fact that, in this regard, as in many others, Congress lives by its own rules. Schweizer notes that the Senate’s ethics manual devotes an entire chapter to the proper use of the mail and of Senate stationery, but is silent on the subject of insider trading. Ditto the rules of the House, which state that a member’s recusal from a vote affecting his or her stock portfolio “might be denying a voice” in the process. Neither the executive nor judicial branches allow such laxity.

Only one way to find out for use, of course. So I bought the book. As should you. It reams out the corruption on both sides of the aisle in Washington.

Comments

In the Spring of 2010, a bespectacled, middle-aged policy wonk named Peter Schweizer fired up his laptop and began a months-long odyssey into a forbidding maze of public databases, hunting for the financial secrets of Washington’s most powerful politicians. Schweizer had been struck by the fact that members of Congress are free to buy and sell stocks in companies whose fate can be profoundly influenced, or even determined, by Washington policy, and he wondered, do these ultimate insiders act on what they know? Yes, Schweizer found, they certainly seem to. Schweizer’s research revealed that some of Congress’s most prominent members are in a position to routinely engage in what amounts to a legal form of insider trading, profiting from investment activity that, he says, “would send the rest of us to prison.”

Walter Olson courteously rounds up the list of high profile cases identified by Schweizer:

Washington has been buzzing for the past 48 hours over revelations that some of Capitol Hill’s best-known lawmakers have been making fortunes speculating in the stocks of companies affected by official actions, typically while in possession of market-moving inside information. Rep. John Boehner (R-OH), Senatorial wife Teresa Kerry and others made bundles trading in health companies’ stocks shortly before Congressional or executive-branch action affecting the companies’ fortunes. After closed-door 2008 meetings in which Fed chairman Ben Bernanke briefed Congress on the gravity of the financial collapse, some lawmakers dumped their own stockholdings or even placed bets that the market would fall. Rep. Nancy Pelosi (D-CA) got access to highly desirable IPO (initial public offering) stock placements, some in companies with business before Congress. And so on. Studies have found that lawmakers as a group reap far above-average returns on their investments—suggesting either that these politicians are among the world’s cleverest investors, or else that they are profiting from inside information. All this has been turned into a front-page issue thanks to Throw Them All Out, a book by Hoover fellow Peter Schweizer, whose findings were showcased the other night on 60 Minutes.

Regular readers know that I believe Congressional insider trading is both wrong morally and ethically but also legal under current law. Hence, my support for the STOCK Act, which would ban it. See my article Insider Trading Inside the Beltway. Very regular readers know I've been going back and forth with law professor Donna Nagy on this issue in the comments section of a prior post. FWIW, Olson agrees with me:

So the question is: is all this legal? While there’s some difference of opinion on the issue among law professors, the proper answer to that question is most likely going to be, “Yes, it’s legal.” As UCLA’s Stephen Bainbridge points out, existing insider trading law, developed by way of a long series of contested cases under the Securities and Exchange Commission’s Rule 10b-5, assigns liability to persons who are not corporate insiders if they are violating a recognized duty of loyalty to those for whom they work. As applied to the investment whizzes of the Hill, this implies that trading on inside information might be a violation if done by Congressional staffers (since they owe a duty of loyalty to higher-ups) but not when done by members of Congress themselves.

So, apparently, does Schweizer:

When Schweizer began his project, he consulted a former securities regulator, who happened to have an office down the hall from his in Florida. The adviser told him that investigators always look for two things in insider-trading cases: whether individuals had access to material information and whether they engaged in unusual trading. There is probably no group of people on earth with greater access to inside information than members of Congress; K Street lobbying firms get rich fees from hedge funds for ferreting out intelligence (such as whether some pending legislation has the votes to pass) that any member of the Senate or House routinely obtains in the cloak room.

But there have been no insider-trading cases brought against members of Congress, nor will there likely be. This is partly because, though insider-trading law is not settled, case law usually requires that an offending insider bear fiduciary responsibility at the company involved. But Congress’s relative immunity also owes to the fact that, in this regard, as in many others, Congress lives by its own rules. Schweizer notes that the Senate’s ethics manual devotes an entire chapter to the proper use of the mail and of Senate stationery, but is silent on the subject of insider trading. Ditto the rules of the House, which state that a member’s recusal from a vote affecting his or her stock portfolio “might be denying a voice” in the process. Neither the executive nor judicial branches allow such laxity.

Only one way to find out for use, of course. So I bought the book. As should you. It reams out the corruption on both sides of the aisle in Washington.